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What Happens to Directors Who Don't Play By The Book

By Debbie Cockerton

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It’s easy to set up a limited company; they can be bought ‘off the shelf’ in a matter of minutes. But do new directors understand The Companies Act and know what the duties of a director really are? In reality, the answer is very often ‘no’ – the directors have no idea of what obligations face them in the future. Sometimes, at the start of the company’s life, the company accountants (if the company has one) will advise the directors of their duties, but all too often they start to trade with no knowledge at all of how to run a business from the legal side.

When a company goes into administration, administrative receivership or liquidation, whether voluntary or compulsory liquidation, the Insolvency Act and insolvency rules kick in and the administrator/liquidator has a statutory duty to report on the director’s conduct of the company under the Company Directors Disqualification Act 1986 (CDDA). The insolvency practitioner will have to report to the Secretary of State for Business, Innovation & Skills all directors who held office in the last three years of the company’s trading. It will be the Secretary of State who decides to seek a disqualification order. CDDA is a powerful tool against those directors who abuse the system and will also apply to shadow and defacto directors. So what are they looking for? And what happens to the directors: are they named and shamed?

The courts will be looking for criminal offences, fraudulent and wrongful trading; trading while knowingly insolvent; failure to keep proper accounting records; failing to comply with filing requirements; trading to the detriment of creditors; and any other unfit conduct.

Disqualification can be for a minimum period of two and a maximum of 15 years.
The directors will be notified of the decision to apply for disqualification and the Secretary of State must apply for disqualification within two years of the date of insolvency, unless the court extends the time.

The director can give an undertaking of a disqualification to the Secretary of State, rather than face court attendance, which saves costs. This changed with the introduction of the Insolvency Act 2000, which saves the necessity of a court involvement.

So how is the director affected? Unless they obtain the courts permission, the director is disqualified from:

• being a director of a company.

• acting as a receiver of the company’s property, directly or indirectly be concerned, or take part, in the promotion, formation, or management of a company, or a LLP.

• acting as an insolvency practitioner.

The director will also have to pay “for the pleasure” of going through the disqualification order, and will be liable to pay the costs of the disqualification proceedings!

If someone contravenes a disqualification order or undertaking they will be committing a criminal offence and liable to prosecution; they can also be held personally liable for all of the debts of the company concerned. They can even go to prison. This does happen, and the Insolvency Service has a telephone hotline which enables the public to report any contraventions to them on 0845 601 3546.

Apart from the disqualification order and them having to pay for the costs of the court case, the directors will also have their name on public record in the Registrar of Companies. It is also recorded on the Insolvency Service website for all to see.

If the disqualification order is severe, for example if it involved taking deposits from the public, then the press will pick up on the disqualification order – this always makes interesting reading in the papers.

Published August 2013